Learn all these words and you'll know more terminology than many of the people in the mortgage business!
Learn all these words and you'll know more terminology than many of the people in the mortgage business!
Acceleration Clause A provision in a mortgage agreement that gives the lender the right to demand payment of the entire principal balance if the borrower misses a monthly payment.
Adjustable Rate Mortgages (ARMs) See also FIRMs. Generally 30-year mortgages that are fixed for a number of years, then become 1-year adjustable-rate mortgages. The adjustable portion is usually tied to the yield on 52-week Treasury Bills. They generally come with an initial fixed-rate/fixed payment period of 5, 7, or 10 years. After that, the rates and payments can change each year for the remainder of the 30 years. These loans are also called 5/1, 7/1, or 10/1 loans. Generally, the shorter the fixed-rate period, the lower the starting rate. Rates are typically lower than Fixed-Rate Mortgages. Since the average homeowner moves or refinances every 5 to 7 years, Adjustable Rate Mortgages are typically the best value because they are only paying to fix the rate as long as they will have the loan.
Adjustment Interval How often the rate changes in an ARM (adjustable rate mortgage). This is typically one, three, or five years. Be careful some mortgage companies adjust upwards quickly, but adjust downwards very slowly. They make you wait for the benefits of lower rates, but charge you rate increases virtually on the spot. Avoid these folks.
Applications Fee(s) Fees charged at the time of application may be lumped into one fee or broken out. It is common to see a Application Fee, a Credit Report Fee, and an Appraisal Fee when you apply. Good lenders, like DCU, only charge you to recover actual costs. Unfortunately, some lenders use application fees as a profit center.
Appraisals or Appraised Value What is something worth? In the mortgage world, only certified appraisals matter. Certified appraisals mean the appraiser has a license to do their work.
ARM Adjustable Rate Mortgage A loan with a payment that adjusts up and down based on interest changes. ARM features benefits varies widely. To quickly learn the pros and cons about ARMs, see Adjustment Interval, Teaser Rates, Fully-Indexed Rates, Negative Amortization, and Deferred Interest.
Assessed Value The value used by your local county tax assessor to determine property taxes. Assessed values are seldom the real value of a property and generally go up when a property is sold since the new assessed value is generally influenced by the new selling price. See Appraisals.
Assumable Mortgage An assumable mortgage allows an approved buyer to assume your old mortgage, which can be an attractive feature if interest rates have gone up since you received your mortgage. Because Assumable Mortgages caused so many problems during the savings and loan scandal several years ago, very few lenders offer any form of assumable mortgage.
Balloon Loan Be very careful with these. Balloons have lower payments than fixed loans, but end up with one huge payment at the end. Balloons may be valuable in certain circumstances. We'll help you decide if one could work for you.
Betterment An improvement that increases property value as distinguished from repairs or replacements that simply maintain value. Adding a deck or finishing off a basement would be examples of betterments. Betterment can also refer to an assessment or tax added to real property by the town for improvements made. Example: If the town decided to convert to public sewer they may add a betterment to all property in the town to pay for the sewer work.
Basis Point A hundredth of one percent. This term is often used by economists, the financial services industry, and the investment industry to describe fractional changes in interest rates and yields. For example, if mortgage rates rose from 6.25% to 7.00%, they increased 75 basis points.
Bridge Loan A loan that lets you borrow some of the equity tied up in your current home, until that home sells. People generally use a bridge loan to help them buy a second house before their first house has sold. Bridge loans can be dangerous. We can tell you the pitfalls.
Buy Down Generally, for a given mortgage term, you will get a lower interest rate as you pay more in points. Some borrowers consider choosing a higher point option to get a lower interest rate. See Points.
Cap There are usually two of these with an ARM. One cap is the maximum amount the interest rate can adjust up or down each year. Two percent is common. The other cap is the maximum change over the life of the loan. Most common is 5% to 6% above or below the starting rate.
For example, say you have an ARM with caps of 2% per year and 5% over the life of the loan. Your starting fully-indexed rate is 7%. By your one-year anniversary date, the fully indexed rate has risen to 10%. Your rate will only rise to rise to 9%. If rates continue to rise, the maximum your rate can be on the second anniversary date is 11%. The most it could ever be is 12%. Believe it or not, a few loans have no maximum caps! Don't get one of those.
CARMs Convertible adjustable rate mortgages. A CARM allows you to convert an ARM (an adjustable mortgage) to a fixed mortgage. CARMs can be more expensive than an ARM. The conversion feature can usually only be exercised on an anniversary date and often for the first five years of the mortgage. Generally someone will want to convert to fixed-rates when rates are rising, but the rates on Fixed-Rate Mortgages are typically higher than the rates for Adjustable Rate Mortgages at any given time. In other words, you'll exchange a lower payment for a higher payment to convert. Some CARMS may carry a conversion charge, which can run a percent or so. Use with caution.
Cash Reserve Enough money, after closing, to allow you to make a couple of mortgage payments and cover emergencies. Lenders require cash reserves, and time. But regardless of the lender, a cash reserve is a good thing.
Closing This is when the loan is funded and the deed is actually transferred between seller and purchaser. This is sometimes called settlement.
Closing Costs This encompasses everything you pay at closing that is not part of the actual purchase price. It includes taxes and government fees, legal services, fees to the lender for processing the mortgages, and other fees. The amount can vary enormously between lenders. Your down payment does not cover these costs. We give you a rundown on closing costs right here on-line.
Closing Disclosure This is a document itemizing the costs to be paid at closing. It includes points, fees, and other charges.
COFI The Cost of Funds Index, is an index used by some mortgage companies to determine the rate on your adjustable mortgage.
Comparable Other homes similar to a specific home in the same neighborhood, usually that have recently sold. The sale prices of Comparables are used to estimate the market value of a home.
Comparative Market Analysis (CMA) Real estate agents present this report to sellers before the home goes on the market. It uses data on comparable homes to estimate market value. The report helps the seller set a realistic asking price.
Condominiums Are usually apartments, townhomes (townhouses), or other dwellings with adjoining walls or other common spaces. If you buy a condominium, you buy the space inside your walls and a portion of the common areas.
Contingencies If you are a potential homebuyer, read this carefully! These are conditions that have to be met before a contract can be enforced. If you are a buyer, for instance, make sure your purchase contract has a contingency clause that lets you out of the purchase if you can't get financing.
Conventional Mortgage A mortgage not insured by a government agency.
Cooperatives They may look like condominiums, but if you buy a cooperative you buy stock in the company that physically owns the property. Since cooperatives usually require board approval for you to buy, they can be harder to finance because they can be harder to resell.
Conforming Loans Mortgages that follow Fannie Mae and/or Freddie Mac guidelines, particularly in their size. (See Fannie Mae and Freddie Mac). For instance, if the maximum loan Freddie Mac or Fannie Mae will approve is for $453,100, any loan of $453,100 and under is a conforming loan. If it's over that amount, the loan is called, logically enough, a non-conforming loan, or a Jumbo. Conforming loans generally have a lower interest rate than jumbo mortgages.
Credit Reporting Services Equifax, Trans Union, and Experian are the three largest of these companies. They collect and evaluate credit information on you, and sell that information to third parties. Their activities and the data they collect are heavily regulated under the Fair Credit Reporting Act.
Deed The actual document which transfers ownership at closing from the seller to the purchaser.
Deed of Trust What you get in many instances rather than a mortgage. Deeds of Trust introduce a third party into the lending scenario, a Trustee, who holds the property in trust. Deeds of Trust are not necessarily bad, but many make it easier for a mortgage company to foreclose on your mortgage.
Deferred Interest A very dangerous situation, indeed. Deferred interest happens when you have an ARM, an adjustable rate mortgage, which doesn't raise payments when interest rates go up, but instead simply adds the cost of the additional interest to your mortgage ergo, your mortgage goes up, even if you make your payments! Stay away from these.
Discount Points Also called points, a point is one percent of the mortgage amount. Generally, the more points you pay, the lower the interest rate on the loan. See Points.
Down Payment The money you use to lower the amount due on a purchase. Though we make less money when you make bigger down payments, we always recommend you make them, if you can. The down payment can come from cash or the equity you have in a home you are selling.
Dual Agent A real estate agent that represents both the seller and buyer in the same transaction. Generally speaking, be careful of dual agent transactions.
Escalation You don't want to ever see this word in a letter from your lender. Escalation means the lender is demanding the total repayment of your mortgage, virtually always because you're way overdue in your payments. You're in default.
Escrow There are two kinds. The first is before a sale. In this case, an escrow account is established by neutral third parties to hold money for a seller or buyer. Your down payment or earnest money can go into an escrow account. Some people call these Impound Accounts.
The second type of escrow account occurs after the sale. If your down payment is less than 20% of the home's value, your lender will typically require an escrow account. An amount will be added to your monthly payment to cover property taxes and property insurance. This amount goes into the escrow account. The lender will pay those bills on your behalf from that account. Escrow accounts typically pay interest or dividends on any balance.
Equity This is the portion of the property's appraised value in excess of the amount owed on the property. For example, if your home is worth $200,000, your mortgage balance is $150,000, and there are no other loans or liens against the property, you equity is $50,000. You can take out a home equity loan against that amount. The amount of equity that you can actually recover when you sell your home will vary based on the actual sale price and costs to sell your home.
FHA Mortgage When the Federal Housing Authority guarantees a loan by a lender. FHA mortgages were designed for persons with low income, generally, and for many first-time buyers. Because the FHA guarantees payment, FHA mortgages usually require a lower down payment, and may sometimes have a lower interest rate. FHA mortgages have stringent home inspection requirements. All FHA mortgages require mortgage insurance. Even if you qualify for an FHA Loan, it may not be the best choice for your situation. Make sure you compare it with your other options.
Fannie Mae Fannie Mae is short for Federal National Mortgage Corporation. Fannie Mae is one of the private companies (Freddie Mac is another), chartered and subsidized by the federal government to provide lenders a source of funds to make mortgages. Fannie Mae and Freddie Mac set standards for mortgage loans, purchase mortgages, and resell an interest in them to investors. Mortgages that follow Fannie Mae and Freddie Mac guidelines are usually cheaper. See Freddie Mac.
FIRMs Fixed Interim-rate Mortgages. See also Adjustable Rate Mortgages.
Fixed-Rate Mortgage The interest rate remains unchanged throughout the length of the loan. Fixed-rate mortgages generally cost more than the first years of an ARM, or adjustable rate mortgage. Thirty-year fixed-rate mortgages are the most popular type of mortgage in America. You will also find mortgages with rates fixed for 10, 15, 20, or 40 years. In general, as the term gets longer, the monthly payments gets smaller and the interest rate gets higher. If you can afford the higher payments of a shorter-term loan, you'll pay less interest overall.
Foreclosure Foreclosure is when the lender legally seizes a property in default. Foreclosure happens when you get behind on your payments, can't honor your escalation clause (which says you have to pay off your mortgage right now). A StreetWise Tip: Some foreclosures happen quicker than others, for instance, if your mortgage company uses a deed of trust, that company generally doesn't have to go to court to foreclose on your property. Rules vary on foreclosure state-to-state. In a foreclosure, the property is sold to satisfy the loan amount and the costs to foreclose. If funds are left over, the borrower gets them. If there is not sufficient equity to cover those costs, the borrower is still liable for any difference.
Freddie Mac Freddie Mac is short for Federal Home Loan Mortgage Corporation. Freddie Mac is one of the private companies (Fannie Mae is another), chartered and subsidized by the federal government to provide lenders a source of funds to make mortgages. Freddie Mac and Fannie Mae set standards for mortgage loans, purchase mortgages, and resell an interest in them to investors. Mortgages that follow Freddie Mac and Fannie Mae guidelines are usually cheaper. See Fannie Mae.
FSBO Actually pronounced Fizbow. A FSBO home sale simply means For Sale by Owner. No real estate agent is involved.
Fully-indexed Rate The fully-indexed rate tells you what an ARM, an adjustable rate mortgage, is really going to cost you in interest. An ARM's rate is based on a publicly available index, plus a margin. The fully indexed-rate is the current sum of these two percentages. Some lenders quote you a promotional or introductory rate to get your business, but gloss over the fact that the fully-indexed rate is usually dramatically higher. We won't let this happen to you.
GEMs Growing equity mortgages. GEMs raise your payments after a certain number of years, but the entire payment increase goes to reduce your mortgage. GEMs allow you to pay off a 30 year mortgage in about 18 years. These are not widely available.
Home Equity Loans Home equity loans can be set up as fixed-rate installment loans (sometimes called Second Mortgages), home equity lines of credit (HELOC), or a combination of the two. These can be more economical than other loans for home improvements, education, automobiles, and other purposes because interest is tax deductible for most people. Rates are typically less than consumer loans, too. But shop around. Rates and terms vary. Many lenders raise your rates if your balance drops below a minimum and charge you annual fees. Remember, too, your home is the security on the loan. If you sell your home, you'll need to pay off any balance at closing or before.
Hybrid mortgages Another name for Adjustable Rate Mortgages.
Index This is a publicly-available percentage on which variable-rate loan rates are based. The current rate of the index plus a margin equals the Fully-Indexed Rate. For instance, the index on most ARMs is the yield on 52-week US Treasury Bills. A common margin is 2.875%. The index on most Home Equity Lines of Credit is the Prime Rate often the one published in the Wall Street Journal. The fully-indexed rate is typically advertised as Prime plus 0% or some other margin. The index changes over the life of the loan, but the margin remains constant.
Interest-Only Mortgages With this type of mortgage, you make payments of interest and no principal for part of the term or all of the term. In the first case, at the end of the interest-only period, you'll begin making regular principal and interest payments. For the latter, you will have a balloon payment for all the principal due at the end of the term. This type of mortgage results in lower payments than a standard principal and interest mortgage because you are not paying down your principal as you go.
Joint Tenancy When two or more people have equal ownership of property.
Jumbo Loans Jumbo loans are mortgages over the amount Fannie Mae and Freddie Mac will purchase.
Liens Pronounced LEEN. This is a legal right to hold property or have it sold or applied for payment of a claim. The most common type of lien is called a security interest the mortgage loan is secured by the property. In other words, if a home is sold, the owner cannot receive any proceeds until the mortgage is paid off. Legally, there is an order of payment for liens, too. Your mortgage lender typically has the first claim hence the term first mortgage. A home equity lender typically has the second claim, also called the second mortgage or second lien. Liens on real property must be recorded with the courts to be valid. Once recorded, they become part of the public record.
A tax lien is filed with the courts by the government when someone has not paid their taxes. It most often occurs when property or income taxes are not paid. With court approval, the property can be sold, usually at auction, to satisfy the back taxes. Tax liens must be satisfied before other lienholders are paid unless the court directs otherwise.
A mechanic's lien most often appears when you buy a new home directly from a builder and the builder has not paid a subcontractor. The subcontractor can file a mechanic's lien with the court against that property and, with court approval have it sold to satisfy the unpaid claim. The title search done when buying property is supposed to uncover any outstanding liens or claims against the property you are buying. If you own a property without liens, you are said to own it free and clear.
Lock-in Period How long the lender will guarantee rates and terms. For instance, if a lender says their loan is a 100,000, 8% loan for 30 years, with a thirty-day lock-in, this lender will only guarantee those terms for a month. This most typically refers to rates. If a borrower expects rates to increase before closing, they will want to lock in the current rate. Most lenders will let you lock in your rate for up to 60 days. If the borrower expects rates to fall, they may want to let the rate float and lock-in closer to the closing date.
Loan Origination Fee, also called Points Charged by the lender, a loan origination fee when charged is usually one percent of the mortgage amount.
LTV (Loan to Value) Ratio The relationship of the property's appraised market value to the total amount of the loan. Lenders prefer loans with low LTV ratios because there is less risk that they will lose principal if the mortgage must be foreclosed.
Mortgagee The lender.
Mortgagor The buyer.
Mortgage Title Policy A policy you provide which indemnifies the lender if there are any undisclosed liens or other snags concerning the property you're buying. Title insurance does not protect you against property line disputes.
Negative Amortization This is when your monthly payment is not large enough to pay all the loan interest accrued for that month. The amount your payment doesn't cover is added to the loan principal. With each regular payment, you owe more. See Deferred Interest. Stay away from loans where negative amortization is possible.
Non-Conforming Loan These are mortgages that do not meet loan guidelines provided by Fannie Mae and Freddie Mac. Most non-conforming loans are Jumbos, but there are other reasons mortgages may not conform.
Origination Fee The charge for processing and funding your loan. Origination fees can run from 1% to 2% of the loan amount. Most lenders include this with the total points advertised with the mortgage rate. Make sure your lender does before you apply or you could be in for an expensive surprise. Lenders that only advertise the discount points do so to make the mortgage seem more competitive than it really is.
Plat A map of a plot of ground. This term is often used for the property map recorded with government agency that keeps land records. The land drawing you receive when buying a home is usually a simplified version of the recorded plat.
Points also describes Discount Points and Origination Fee A point is simply one percent of any loan. Points sound so small, but can be so large. If you're getting a $175,000 mortgage, for instance, a single point is $1,750. Generally the fewer points you pay, the higher the rate. No-point, no-closing cost mortgage products tend to have the highest rates. The best combination of rates and points for you typically depends on how long you expect to have the mortgage or remain in the home. If the time is short, paying fewer points is typically best. If the time is long, paying more points to get a better rate may be better. The amount of money you have available to pay points at closing is also a factor. Also, make sure the points disclosed up front by the lender include both any discount points and the origination fee before you apply. Some lenders will only advertise the Discount Points with the mortgage rate, leaving you a nasty surprise when extra origination fee points pop up in the closing costs. How do you decide if you should pay the points, or pay a higher rate? We can help. Ask us.
Premium Pricing The spread between the wholesale (or par) interest rate quoted by secondary market investors and the rate a lender quotes borrowers. Make sure you shop around. If lenders set high premiums to make higher earnings, they are likely to price themselves out of the market. Many times premiums are split between mortgage brokers and lenders.
Prepayment Penalties Mortgages with prepayment penalties actually charge you money if you want to pay off a loan early. Avoid any mortgage with this provision. DCU will never charge you prepayment penalties.
Pre-Qualification A pre-qualification is a fast check to see how much mortgage you are likely to qualify for. If done correctly, it can help you narrow your home search to a realistic price range. Be careful, though. Pre-qualifications aren't binding. Real estate agents will often prequalify you for large loans so they can show you more expensive homes. Make sure you know what mortgage payment you can afford before you shop. By obtaining a pre-qualification, you will know how much you can borrow based on information provided. A StreetWise Tip: When you have been pre-qualified by a DCU Loan Officer, you are also in a much better position to negotiate with a seller. Remember that mortgage pre-qualifications are typically conditional. Getting the loan will still depend if the appraisal on the home you want to buy falls within the proper range. There may be other factors as well.
Principal This is the loan amount at any given time. Your mortgage payment is made up of principal and interest. If the loan is based on monthly interest, the interest is calculated by multiplying the principal balance each month times the periodic interest rate (typically the interest rate divided by 12 months).
Private Mortgage Insurance Private mortgage insurance. You have to provide this when your loan has an LTV of 80% or higher. This insurance indemnifies the lender if you default, the lender forecloses, and the proceeds of the sale don't cover what you owe plus foreclosure expenses.
Proration What percentage of taxes and other fees you pay at closing versus what percentage the other side pays. In many states, real estate taxes are pro-rated to the day of closing.
Radon Radon is a colorless, odorless radioactive gas that occurs naturally underground. Prolonged exposure to high levels of radon can cause cancer. It causes problems when it seeps into basements. It is prudent to have testing done on any home you are about to purchase and make passage of this test a condition of the sale.
Ratios Two ratios really interest lenders. (1) How does the amount of your potential mortgage payment compare to your gross monthly income? Lenders generally don't want your payment over 28% of your income. (2) How does your total debt compare to your gross monthly income? Lenders generally don't want your total debt to be over 36%.
Settlement Agent The person in charge of actually closing the sale of a property.
Survey A drawing that shows the boundaries of property. If there are easements, buildings, or other improvements on the property, those areas also show on the survey. Note that the survey you typically see when you buy a home is not a thorough check of the property. Structures that encroach upon property lines may not show and could cause expensive problems later.
Sweat Equity If you are having a home built or rehabilitated and are doing any of the physical labor yourself, this is the value of your effort.
Teaser Rates Also called Introductory Rates, these are promoted by many mortgage companies to entice you to apply. It may not last long. They may not clearly emphasize when and how high your rate may rise. Never pick a mortgage based on the teaser rate alone. See Fully-Indexed Rate and ask how fast your rate will rise to it before you go any further.
Tenancy in Common A legal term for when two or more people jointly own property. There is no right to survivorship meaning if one of the joint owners dies, their ownership interest passes to their heirs not necessarily the other owner(s).
Tenancy by the Entirety This is a legal term for when two people jointly own property with rights of survivorship. It means when one joint owner dies, their ownership interest passes to the other owner. It is only available to married couples.
Truth-in-Lending This is a federal law that requires lenders to fully disclose in writing the terms and conditions of loans including mortgages.
VA Loan A loan guaranteed by the Veteran's Administration. VA Loans are only made to individuals who have served in one of the U.S. Armed Forces. Even if you qualify for a VA Loan, it may not be the best choice for your situation. Make sure you compare it with your other options.
Warranty Deed A document that guarantees the genuineness of a piece of property when it comes to legal description and history.